CORPORATE CONDUCT: THE OVERVIEW

By GRETCHEN MORGENSON and LANDON THOMAS Jr.

Published: September 18, 2003

Richard A. Grasso resigned yesterday as chairman and chief executive of the New York Stock Exchange after three weeks of blistering criticism of his pay package.

Mr. Grasso had a remarkable rise at the exchange, from a clerk earning $82.50 a week in 1968 to its top executive in 1995. When it was announced last month that he would receive $139.5 million in deferred pay and retirement benefits, a furor erupted as critics noted that he was not just a market leader but a regulator whose pay was set by some of the people he oversaw. The outrage over his pay threatened to engulf the exchange itself.

Under pressure from the board and after several public pension funds Tuesday called for him to leave, Mr. Grasso offered his resignation yesterday in a hastily arranged telephone meeting with directors that began after the markets closed and lasted for two hours. A heated discussion among the directors ensued, with 13 of the 20 participants ultimately voting to accept Mr. Grasso's resignation. The seven other directors on the call opposed the resignation of Mr. Grasso.

Mr. Grasso left the exchange building through a side door yesterday evening amid hugs and tears from co-workers, although he himself did not shed a tear, according to an exchange official who was there. Mr. Grasso is not expected to report to work today, this official said.

''I believe this course is in the best interest of both the exchange and myself,'' Mr. Grasso said in a statement, adding that he was leaving ''with the deepest reluctance.''

Unlike many executives whose pay has drawn fire in recent years, Mr. Grasso has been applauded for his management, including his strong leadership and ability to reopen the markets after Sept. 11.

''This will be the first time in American history where someone who is said to have done a good job is being fired because the board is paying him too much,'' said Jeffrey A. Sonnenfeld, associate dean of the Yale School of Management. ''The board's accountability is the second issue to be dealt with.''

While Mr. Grasso's exit from the exchange will help it quiet the compensation controversy and get back to the business of trading stocks, his departure will by no means put an end to investor scrutiny of the Big Board and its practices. [Page C1.]

Indeed, his resignation may bring significant change to the Big Board, under pressure from critics who may seize on weakness at the institution. For years, they have complained about what they call the exchange's obsolete trading platforms, secrecy in its operations and potential conflicts of interest in its dual role of regulator and protector of member firms.

The board of the exchange is already considering additional changes in the composition and selection of its members to achieve more independence and represent investors. After Mr. Grasso's resignation was announced, Laura Cox, managing executive for external affairs at the Securities and Exchange Commission, said: ''The S.E.C. will continue its review of governance standards and will work closely with the new leadership at the exchange to put an appropriate structure in place that will ensure the credibility and integrity of the governance of the exchange.''

The seeds of Mr. Grasso's downfall were sown with the disclosure of an employment contract struck in August that provided payments totaling $139.5 million in deferred compensation, savings and pension benefits. Exchange officials said that Mr. Grasso accumulated the sum by deferring significant components of his pay during his 20 years as an executive at the exchange.

Less than a week after the pay package was disclosed, William H. Donaldson, chairman of the Securities and Exchange Commission, wrote a letter to the Big Board demanding details of Mr. Grasso's compensation. ''In my view, the approval of Mr. Grasso's pay package raises serious questions regarding the effectiveness of the N.Y.S.E.'s current governance structure,'' Mr. Donaldson wrote to H. Carl McCall, the new chairman of the Big Board's compensation committee.

The firestorm over Mr. Grasso only escalated as politicians and pension fund managers said he had lost credibility. To demonstrate his desire to change the exchange's governance practices, Mr. Grasso called a meeting of all 26 members of the board for next Wednesday to discuss a set of proposals.

But as the clamor grew, the directors of the Big Board agreed to a telephone meeting yesterday.

Mr. Grasso began his final day at the stock exchange by calling a handful of directors who had supported him or who were undecided about his future to gauge their opinions, said a director who insisted on anonymity. Several of the directors said they advised him gently to resign. The final straw seemed to come at around 1 p.m. in a telephone conversation with a director who suggested that Mr. Grasso put the interest of the exchange before his own.

On the conference call with directors yesterday, Mr. Grasso said that he would be prepared to resign if asked by the board, saying that he had always put the exchange's interest ahead of his own. The board then went into executive session, with him absent, and voted to accept Mr. Grasso's resignation.